This is why investors are returning to the Australian property market.

The prospect of strong capital gains is luring investors back into the market, supported by strong rental price growth that maintains healthy rental yields.

Australia is in the midst of a rental crisis, driven by a chronic shortage of available rental properties and strong rental demand from a rapidly growing population.

According to Ms Eleanor Creagh, Senior Economist at PropTrack:

"This situation has enticed investors to return to the market.

The value of new lending, excluding refinancing, increased for the third consecutive month in April.

This upturn in new lending accompanies improved housing market conditions since 2023, as prices began to recover from the declines seen in 2022."

Confidence among buyers and sellers

Both buyers and sellers remain confident in the current market conditions.

PropTrack's data show that the number of properties hitting the market has increased, and auction volumes this year have consistently been well above the same period last year.

Sales have also lifted substantially.

The 4.8% monthly increase in new lending in April was the strongest since January 2022, and the annual rise of 24.6% year-on-year was the largest since December 2021.

Both investor (5.6%) and owner-occupier (4.3%) lending increased, with growth in new lending driven by investor activity, which is up 36% year-on-year.

Rental prices and yields

Although rental price growth has slowed recently, rents have still increased at a faster rate than property prices.

This has pushed gross rental yields to their highest point in almost four years, according to the latest PropTrack Rental Report.

Ms Creagh further commented:

"The strong growth in rents and increasing property prices have attracted investors, particularly in Queensland, South Australia, and Western Australia, where new lending to investors has hit record highs.

These states have seen strong growth in property prices throughout 2023 and the first half of 2024."

Tight rental markets

PropTrack's data highlights that Queensland, South Australia, and Western Australia are home to the tightest capital city rental markets in the country.

Perth prices have increased by 20.58% over the past year, while Adelaide and Brisbane have grown by 14.49% and 13.69%, respectively.

Vacancy rates remain around 1% in Brisbane, Adelaide, and Perth, making it difficult for many to find available rentals.

This means properties are unlikely to sit untenanted for long, given the high demand.

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Beyond gross rental yields

Gross rental yield is calculated by expressing the annual rental income as a percentage of the property’s market value.

A higher yield can indicate a potentially more profitable investment, especially for cash flow.

However, a lower yield in a high-growth area might still be attractive if the investor is seeking capital appreciation.

For houses in capital cities, suburbs with the highest rental yields are typically found in the outer suburbs.

For units, inner-city suburbs and areas further from the CBD can deliver strong rental returns.

In Darwin, the cheapest capital city market, property prices are significantly lower compared to Sydney, while rental incomes remain proportionally strong, resulting in higher rental yields.

Ms Creagh explained:

"Investors should consider other factors beyond gross rental yields, such as the time it takes to find tenants, maintenance expenses, strata costs, property management fees, insurance, property taxes, and financing costs.

These aspects will influence net rental yields and investment decisions."

Interstate investment

Enquiries on realestate.com.au show more investors are looking to buy interstate.

South Australia has been the most popular state for interstate buyers, accounting for 29% of enquiries.

Queensland and Western Australia follow with 27% and 25% of enquiries, respectively.

This increase in investor activity is expected given the chronic housing shortage, which is likely to drive up house prices and rents further.

Looking ahead

According to Ms Creagh, the shortage of homes is expected to worsen, with building activity at historic low levels while population growth remains strong.

Many investors realize this is likely to drive property prices higher, regardless of where interest rates sit.

Increasing investor activity should add to the pool of long-term rentals, helping to ease rental market constraints and the chronic shortage of rental supply that has fueled high rental price growth and record-high rent.

Despite deteriorating affordability, first-home buyers are still pursuing their property purchasing goals, supported by government incentives.

Both the number (+3.0%) and value (+3.4%) of first-home buyer loans rose in April.

Ongoing home price rises are likely incentivizing many to overcome affordability challenges and transact with the expectation of further price growth.

The tough rental market situation has likely encouraged some renters to purchase their own homes sooner, adding to demand.

Ms Creagh further said:

"The strength in new lending activity is expected to continue as the stage three tax cuts came into effect on July 1, supporting real incomes and boosting borrowing capacities.

Home prices are also expected to lift further, although the pace of growth may slow during the seasonally quieter winter period, particularly with the increasing probability of another rate rise this year."